…fixed rates and others have warned they’ll follow. I know that Commonwealth yesterday was quoting 7.6 per cent for a five-year fixed rate compared to 7.1 per cent on Friday, which won’t give too much joy to the Federal Government trying to talk the dollar up and keep rates down. With me, the Federal Treasurer, Peter Costello. Good morning.

Good morning, Neil.

Are the banks being greedy?

Well, I don’t think any of them have actually moved rates up yet. There’s talk that in relation to fixed rates they’ll be reviewing their situations, but it’s only talk at this stage. The point I’d made in relation to mortgage interest rates is that they’re the lowest in 30 years, that is, they’ve never been lower in the last 29 years and I suppose that can’t last in perpetuity, but I don’t think any of the banks have moved their rates yet.

They’ve been quoting them that way, but they haven’t done it officially. But do they need to? Do they really need to, given the state of the economy?

Well, I don’t believe that there’s any case at the moment for moving rates up, because official rates have not moved. We have official rates. The official rate is what’s set by the Reserve Bank and the official rate is what governs the standard variable mortgage interest rate. That’s what most people are on. That’s the one that varies up and down according to movements in the economy. Now our official rate’s now 5 per cent, lower than the U.S., they’re lower than most countries in the world and they haven’t moved. So there’s no case on the basis of official rates to move standard variable rates.

Of course, we’re talking about fixed rates ‘though, fixed rates here. Now, have they got a case to increase those?

Well, in relation to fixed rates what the banks, suppose it’s a five-year rate. What the bank says is they’re not just interested in what interest rates are they’re interested in what they’re going to be in five years’ time. They’re starting to make their own judgments. I heard one banker making the point this morning. A lot of bankers are now saying rates are going to rise aren’t they? Well, last week they were saying they were going to fall. So, you know, there’s been a lot of changed opinions in the banking community.

You’ve been fairly critical of banks in the past if they have jumped too quickly on interest rates, I mean. What do you want them to do now? What do you think they should be doing now, given that your point about official interest rates they still can do as they wish pretty much can’t they?

Yes, well the point that I was critical of in the past is that when we were, when the Reserve Bank was cutting interest rates throughout the course of 1996 and 1997, the banks were passing those interest rates cuts on with a significant time delay, sometimes 30 and 40 days. Now I was saying: How come when rates go up you pass them on in 3 and 4, and when rates come down you pass them on 30 and 40. I don’t think I ever really got a satisfactory answer to that. So if banks are starting to move on rates that would be a very interesting point to watch, wouldn’t it?

You’ll be watching it carefully.

I do watch it.

Are you going to offer them some advice?

Nobody watches bank interest rates closer than me, I can assure you of that.

Well, have they got justification on the fixed rate, given it’s a long, say a five-year term?

Look, I don’t think that, as I said before, there’s any reason to move rates because official rates have not changed. Now, what banks do is they try and price on assumptions as to what is going to happen not just now but in five years’ time. Now let me make this point. Last week their assumption was that rates would still fall. The speculation this week that rates over the course of years to come will rise. They’re starting to warm up the market in relation to that, but I don’t think there’s any reason to move, nothing’s happened.

A fair chance to say they’re not going to fall though, isn’t it?

Well, you know, the thing that amazed me is if you look at the money markets, and I look at them very carefully, last week they were pricing, last week, I’m talking about seven days ago, they were pricing interest rates falls.

You were out in public yesterday talking up the dollar, talking about the economic fundamentals which you’ve got a fair deal of support for, but it hasn’t worked has it? Because we’ve got the banks talking openly about increasing the interest rates and we’ve got the dollar still under 60.

Well, yesterday what I went out to do was to talk about the Australian economy and to point out that the Australian economy is in very strong shape. I wasn’t trying to fix a particular level of the dollar because we’ve never tried to do that, we have a floating exchange rate, we’ve had a floating exchange rate since about 1984. And the reason why you have a floating exchange rate is that as external events change, your currency can adjust. Now we are living at the moment through the biggest downturn in the Asian region you and I have ever seen in our lifetime. We have never seen an Asia like this, with the possible exception of China, practically all of Asia is now in recession. Asia has been the boom region of the world for our lifetime. And as a result of that you’ve seen Asian currencies that have gone down 50, 60, 70 per cent. Now the Australian dollar was allowed to float to maintain some competitiveness. When your competitors are going down 60 and 70, if you had a fixed exchange rate you would become uncompetitive. So the Australian dollar is a floating currency which was allowed to come down in relation to that to preserve our competitiveness. The point I was making yesterday was this, that in the frenzy of financial markets, markets can always overshoot, and the important thing for those that are looking for long-term values is to look at the fundamentals, and the fundamentals of the Australian economy are strong.

Why is it down then? Why, if the economy is good and it’s strong, why are we down below 60? Given that you don’t accept the rate, you can’t be exactly happy about where it is can you?

Well, the reason why the Australian currency is where it is has got a lot to do with the fact that, you know, the rupiah is down about 70 or 80 per cent and the ringit’s down about 40 and the yen is at 140…

But it’s only a couple of weeks ago, you were talking about a bullet-proof economy. The bullet’s got through.

No, no, no. What I was talking about was strengthening the Australian economy to meet this challenge, and the most important part about that was pulling the Australian Government out of deficit into surplus. Let me ask you this question. Where would Australia be now if we were in deficit?

Well, you tell me the answer.

It would be very shaky.

Banana republic?

I’m not using any phrases, I’m just saying that it would be a shaky proposition if we hadn’t strengthened the Australian economy over the last two years.

It doesn’t overcome the point that a couple of weeks or so ago you were talking about being bullet-proof. Now we are not bullet-proof are we? We have been hurt by Asia. You say our economy’s good, we should have been bullet-proof but we are being badly …

No, you’ll always be affected by international developments, not just Asia incidentally, we will be affected by Asia. We will also be affected by world growth, it’s always been the case and always will be the case. If the U.S. were to turn down – fortunately the U.S. is in a strong position at the moment, and when I say strong position not growing as strongly as Australia but in a strong position, and that determines world activity levels and world prices, and that’s working to our advantage. But if the U.S. were to turn, we would be in a more difficult position again. But we don’t, we didn’t create the Asian crisis, but we have to live with it. And living with the Asian crisis means we have to strengthen every area of the domestic Australian economy against this external challenge.

The Asian crisis is going to hit even harder though, isn’t it? So what’s ahead for us?

Well, nobody can see into the future. It’s hard to think in countries like Korea, Indonesia, Malaysia, it’s hard to think how it could hit even stronger.

It could hit Australia stronger, it hasn’t all got through to Australia has it?

Well, I think in relation to those countries we’ve taken the hit. In relation to the ASEAN countries, like Indonesia, Malaysia, Philippines, our exports to those countries have turned down something like 30 per cent. Now it’s hard to think how you could get another 30 per cent downturn. The good thing is that at the same time we’ve actually increased our exports to the U.S., to Germany and the U.K. So there’s got to be a bit of diversification going on there, but the only country that I would say that we’re watching very closely at the moment is Japan, of course. It’s hard to think how there could be a bigger downturn in Korean or ASEAN, but Japan is still bumping along at no growth, possible negative growth.

There’s one of the indications of how the crisis can hit even harder. The Financial Review reports today the life insurers, Japan’s life insurers, including Nippon Life, have stopped investment in Australian stocks and bonds. Now what’s that going to do to us?

Well, the Japanese financial sector is in a very sick state.

Well, what is it going to do to us if, having made that decision, how will it hurt here?

Well, as I said earlier, Japan’s been in the doldrums for a long time, and this is no new thing. There have been numbers of financial, well there have been financial houses that have fallen over in Japan already, and the Japanese…

What is this decision going to do in Australia, and forget how bad it is in Japan. The decision’s been made that they will stop investment here. What’s that going to do to us?

….there have been financial houses that have fallen over in Japan already.

But what does this decision… going to do to Australia? And forget how bad it is in Japan. The decision has been made that they’ll stop investment here. What’s that going to do to us?

Well you’ve seen what it’s already done to us. That decision wasn’t just made yesterday. Japanese financial houses have been under financial pressure, all of them, under financial pressure for a long time and they’ve been pulling back all over the world. People think in relation to the Japanese financial system that there are institutions which are loaded with debt, that unless the banking system is able to get those bad debts out of the system, there is a problem with the Japanese banking system.

Well how long have we got this problem for? How long has Australia got this problem?

Well I think that we’ve already taken a very significant effect on our exports and it’s hard to think how it could be worse in relation to the ASEAN countries. We expect that the export performance will pick up over 1998-99, because we’ve taken such a, we have taken a clip already in relation to growth. But the other side of the situation is the Australian economy. Now let’s look at the Australian economy.

Well look at the growth. You mentioned a clip in regards to growth, the predictions today for the growth are fairly bad, aren’t they?

Well Australian growth will be clipped, but clipped from what?

And to what?

Well clipped from – the last National Accounts said 4.9 per cent.

Growth figures?

The fastest growing country in the industrialised world, leaving aside Finland. 4.9 per cent, leaving aside China, the fastest in Asia. So we are in an incredibly, we have got a head of steam and we are going to be clipped.

But that’s gone isn’t it? Isn’t that gone?

No, no, no. The head of steam, the 4.9 per cent growth is the most recent figure which is only released about a week ago, right.

Sure.

Now, what do we think will happen? We think that the 4.9 per cent will gradually slow to something like 3 per cent in the average over 1998-99. That’s slower than 4.9. No doubt about that.

Isn’t it, that’s the prediction that you made before all this hit.

No, no, this is, this is…

This is today is it?

We marked down, we marked down growth to take this into account. Which we would have been, we would have been expecting current growth plus and we said we won’t get current growth and we’ll add in a minus figure. Now, to put that in context, at 3 per cent, a 3 per cent growth rate in the Australian economy would be faster than Europe and probably faster than the US.

What about employment? What about your predictions on that?

Well the employment story over the last couple of months has been a good one. Unemployment is now lower than it’s been for eight years in Australia. And if the economy kept growing at 4 per cent plus, would continue to fall. If the economy grows at 3 per cent then it will fall marginally,but you won’t get the increases that you would have otherwise have got. We’ve predicted seven and three quarters, high sevens, it’s currently around about eight.

Do you think though, you’re still being fairly optimistic even at 3 per cent. I notice one of the US banks predicting worse than that today.

Well some banks are predicting less, some are predicting more. I think 3 per cent is about the average. I think when I came out with 3 per cent it was thought to be a little bit low.

Sure, but you stick with that today? Despite with what’s happened in the last few days.

Yes I do. Yes I do.

Will the currency rebound?

Well over the long term the currency will be fixed at a level justified by the fundamentals and the fundamentals are strong.

And you, how soon will we see a movement up?

Look when people are taking positions as they are at the moment on the basis of where do you think the movement is going to be, rather than what the fundamentals are, it’s very much a matter of their assessments. But when the dust clears and they sit down and look at the fundamentals, the fundamentals show a strong economy which is facing an external crisis and weathering it reasonably well.

Are we doomed to be like this, Australia? I mean you tell me the economy is strong and healthy and yet we’re going through a crisis like this, and you agree it’s a crisis?

I agree that the Asian financial meltdown is a crisis, yes I do.

And it’s causing a crisis in this country?

It’s affecting this country but there is no crisis in Australia.

Are we doomed then with a healthy economy and everything going well to be such a captive of the region?

We will always be affected by events in the region and the world. Yes. Let me put it the other way. For the last two decades, Australian policy makers went around the world saying we’re part of Asia. Why? Because they wanted to be part of the region because this was the growth region. Being part of this region was a positive. For the first time in three decades, being part of this region is a negative. In fact we’ve probably convinced the world we were part of Asia right at the time when it became more of a negative than a positive. Now we will always be affected by it, but as Asia turns in the longer term, that will be an advantage. But I can’t say to you, in fact I make this point very strongly. Anybody who thinks that you can seal off the Australian economy, that you can erect walls around it in a way that you won’t be affected by the region or the world, is absolutely mistaken. We will always, we always have been, we always will be affected by the region and the world and the important thing is to make sure that you do everything you can to strengthen your position in relation to it.

Is recession a possibility?

The Australian, no, the Australian economy is growing fast, probably the fastest in the world. The Australian economy will slow as I’ve said in relation to Asia and it will slow probably to around US levels, to US levels, which means we won’t be the fastest in the world, we’ll probably be in amongst the top half.

Going to cost jobs? That slowing?

It won’t cost jobs, but it will mean that the rate of new job creation will not be as fast.

Mr Costello, something else, tax. The Housing Industry Association has declared they’re going to fight the GST, which is perhaps the most significant thump the GST has taken. What’s your reaction to that?

Well I think that, look, I can understand that they’re trying to politick on this, I think they’re wrong.

They say it’ll cost jobs.

I think they’re wrong and the Housing Industry is just saying what every other industry is saying, it’s good for everybody else but not for me. Now if we had the whole of Australia saying it’s good for everybody else to pay tax but not for me, how would you run a tax system?

They say it will add $14,000 to the cost of an average house.

Well I dispute those figures, but we’ve always said and in relation to any, and we’ve said this in relation to Fightback, that in relation to any first homebuyers, if there was an adverse price effect, that you would take measures to equalise that out, which is I think what they want.

So what do you mean, you say you’d give some sort of benefit to a first homebuyer?

You can very easily iron out any adverse affect from that. But people shouldn’t think by the way that they’re currently buying houses tax-free. There’s taxes on all sorts of appliances that you put into your house at the moment.

Is the tax package finished yet?

No, I’m still working on that.

How close?

Pretty close. It’s more advanced now than it was before the Budget. I’d say probably some months in it.

Months? Months before you can release it?

Well I’m working 14 hours a day, I’ll try and lift my work rate a little if you’d like. Look this is a big thing. Neil, can I put this in context?

I know it’s a big thing. But we expected it…

Can I put this in context? We have an income tax system that was set up in 1930 which is now, let me just get this right, nearly 70 years ago, right. We are talking about redesigning something that’s been in place for 70 years and building it from the ground up again.

I understand that. But we’ve been, I mean most of the country has been operating on the expectation that there will be a tax package announced and we’d then go to an election and been looking at August, sometime August. Now you’re saying that your package is months off, it’s June now. July, August, …… spring time election.

I don’t know if people have been speculating on elections, they know things I don’t. All I’m telling you is this…

You must have talked about it?

I talk about it all the time but I’m never told the answer Neil.

You ask the Prime Minister all the time?

I don’t say please tell me the election date but I do say do you feel happy in the spring time or will you feel happier in the summer time. You know I ask sort of questions about all those sorts of things, I never get any answers.

Does a young Prime Minister’s thoughts turn to elections in the spring time?

Could well do. It could turn to all sorts of things Neil, how do we know but….

Would you be free to go to the football finals?

Yes I’ll be free to go to the football finals.

You won’t be working on the tax package then?

I’ll take, well it depends whether Essendon’s playing. If it’s West Coast and Adelaide I may not be free to go to the football final but if it’s Essendon I can assure you that I will not be working between 2.00 and 5.00 pm on the last Saturday in September.

Will the GST rate stay once it’s introduced at the rate it is, it won’t be moved?

Absolutely.

Is there a need for a reduction in the top personal rate and the corporate rate?

I think that our marginal income tax rates are too high, yes I do.

Will they stay at the rate they’re set at then?

Well they should unless they come down further. I wouldn’t rule out bringing them down I mean if you were to say to me today, do you intend to set a top marginal rate which can never move, I would say to you no, I intend to set a top marginal rate which, over time, we could move down. I think the whole trick in Australia, if I may say so, is, we’ve got the Budget in balance we don’t need any more money. This is the whole point people have got to understand. We are not looking for money here. Now as we get a better tax system and a more efficient economy, we should be looking for moving rates down.

What about the corporate rate, move that down as well?

Well I think that with the corporate rate we’ve got to bear in mind that we are again in tax competition in the region and we’ve got to make sure it’s competitive, that’s all I’ll say, competitive.

What do you think of the 30, 30, 10 scenario, does it add up?

No.

What does?

Next question.

How are you going to sell it?

Well are we, as we’ve said, we are going to engage in an information campaign. The first thing that we’ve got to tell people is how the current tax system works. Now there’s a lot of people for example who say, oh a GST that must be a new tax, it’s in addition to current taxes. It’s not, a GST replaces other taxes which are abolished, wholly abolished and they don’t even know that they are even paying these other taxes, like the wholesale sales tax and other taxes. And of course that’s part of the misrepresentation of the whole package.

Will there be packages at the bottom end to help people who are, perhaps even tax credits, to help people on lower incomes?

Oh yes, because at the end of the day, what we want to do is help those at the lower end of the income scale. One of the problems they face at the moment, this is a very important point that I keep on trying to make, is that if you are a low income earner, let’s say you are on about $20,000, and you’ve got a wife and a family. As you earn more, not only do you pay more tax but you start losing benefits. You lose family allowance benefits, you can start being priced out of health rebates and you get to a stage where by earning more you can take home less.

If you look at the whole thing, will everybody be paying less tax?

No, some people will pay more.

Who?

People who currently avoid their tax liabilities.

What about high income earners, if they are not avoiding their tax?

People who operate in the cash economy are going to pay more tax.

Black economy?

Yeah.

What about the high income earners, will they be paying more tax, provided they’re following the law at the moment?

They wouldn’t, if they’re paying their full amount, then they wouldn’t be paying. Suppose they’re paying their full income tax at the moment. We all know by the way that after you get to a certain level in income you manage to sort of get out of the income tax system. Well, let’s suppose there is somebody today who is a high income earner who is paying 48.5 per cent on every dollar they earn. It is conceivable that they could pay more if they happen to be big spenders, because the GST will effect things that they currently buy for free like aeroplanes and caviar. It depends on their consumption I mean if you want to hop on a Lear jet and go to Paris and buy some caviar, you’re not taxed at the moment, you realise that, under the wholesale sales tax. If you want to go down to the supermarket and buy some personal toiletries, you are.

The Victorian, just something else, the Victorian Treasurer, because we are nearly out of time, Mr Stockdale seems to be suggesting a means test for public hospitals today that because of the dispute over funding, which I think has to be signed by tonight if they are going to get it. What’s your reaction to a means test of public hospitals?

I haven’t seen his comments, I can’t comment on them but it’s certainly not Federal Government policy.

Is that health problem nearly sorted out do you know?

I hope so, look I hope so. I think that there are a lot of good things in the package that’s available, including by the way, there’s $4 million a week once the agreement’s signed to get down waiting lists. If you sign today you get your share of $4 million to get down waiting lists which I think is a great idea.

A bit of a mess the hospitals, aren’t they?

Look I think, let me put this in context, by world standards the Australian health system is considered on of the best, having said that it needs to be improved.

Gambling, will you rewrite the guidelines as Jeff Kennett’s asked?

I will take on board some of his points but I will not be accepting all of them, no.

Will the inquiry cover things like bingo, horse racing?

Yes.

Really, bingo.

Yes, they can look at it. I don’t think people are worried about bingo and horse racing by the way. When we’re looking at the effects on problem gamblers and the effects on the economy what people are most interested in my view are slot machines, poker machines and casinos. And I expect that to be its principal focus.

I asked you whenever we speak, which is not as often these days, but would you like to be leader one day?

Leader of what?

Australia.

Oh, of Australia.

Prime Minister.

Oh well as you know it’s one of those questions you always ask me and it’s one of those questions I never answer.

Do you think you might answer it one day?

One day yes, perhaps when I’ve retired.

You don’t think you’re a bit closer than you were last time I asked you.

To retirement.

To leadership.

I’m probably about a year closer to retirement now.

Alright, oh there’s one other thing, I had a bet with you about football, Melbourne Essendon, I need to pay you.

Oh thanks.

And I can give you an option, Australian dollars, US dollars, which do you want?

I’ll take the A dollars because you’re offering me one US dollar for 50 A dollars.

That was a five actually.

Oh it’s only a five, I’ll still take the five thanks very much.

Thank you very much for your time.

Thanks very much.